Direct Tax – Supreme Court

The Hon’ble Apex Court has dismissed the Special Leave Petition filed against the order of the Delhi High Court in the case of CIT v. Subrata Roy wherein it was held that an amount advanced by the firm, in which the assessee was a partner, to the assessee, could not be said to have been advanced by the company in which the assessee was a shareholder despite the firm owing money to the company. A certain sum of money was due by the firm to the company. It was the case of the Assessing Officer that the firm was used as a conduit to advance the loan to the shareholder by the company from out of the outstanding receivable from the firm. It was held by the High Court that the sum cannot be said to have been advanced by the company, when it was proved by the assessee that the firm had sufficient funds on its own to advance the money and therefore, the provisions of section 2(22)(e) is not attracted. (AY. 1992-93)

Dismissing the appeal the Court held that the amounts collected by the assessee from its customers towards apprehended sales tax liability on sale of bottles and packing materials were not taxable because they were refundable. (AYs. 1988-89, 1989-90, 1990-91)

CIT v. Khoday Breweries Ltd ( 2016) 382 ITR 1 (SC)

S.10(23C) : Educational institution – Existing solely for the purpose of education and without any profit motive – Huge surplus – Not entitled to exemption

Disallowing the exemption the Court held that there was huge surplus (in excess of 6 to 15%) and minimal expenditure implies profit motive. Court also held that, therefore, it would be more appropriate to hold that funds received from the Government contemplated under Section 10(23c)(iiiab) of the Act must be direct grants/contributions from governmental sources and not fees collected under the statute. The view of the Delhi High Court in Mother Diary Fruit & Vegetable Private Limited v. Hatim Ali & Anr. [(2015) 217 DLT 470] which had been brought to the notice of the Court has to be understood in the context of the definition of ‘public authority’ as specified in Section 2(h)(d)(ii) of the Right to Information Act, 2005. Reliance has been placed on the judgment of the High Court of Karnataka in Commissioner of Income-tax, Bengaluru vs. Indian Institute of Management (2014) 49 Taxmann.com 136 (Karnataka). The situation before us, on facts, is different leading to the irresistible conclusion that the University does not satisfy the second requirement spelt out by Section 10(23)(c)(iiiab) of the Act. The appellant University is neither directly nor even substantially financed by the Government so as to be entitled to exemption under the Act. (CA Nos. 4361-4366 of 2016, dt. 12-4-2016)

S.12AA : Procedure for registration – Trusts or institutions – Non- disposal of an application for registration before the expiry of six months as provided u/s. 12AA (2) results in deemed grant of registration. [S.2(15)]

In Society for the Promotion of Education, Adventure Sport & Conservation of Environment v. Commissioner of Income Tax (2008) 216 CTR (All.) 167, the Allahabad High Court held that non disposal of an application for registration before the expiry of six months as provided u/s. 12AA (2) would result in deemed grant of registration. However, this was reversed by the Full Bench of the Allahabad High Court in CIT v. Muzafar Nagar Development Authority (2015) 372 ITR 209.

The Department appealed from the decision of the High Court expressing an apprehension that since the date of application was February 24, 2003, at the worst it would operate only after 6 months from the date of application. Held that there was no basis for such an apprehension since that was the only logical sense in which the Judgment could be understood. The registration under Section 12AA of the Income-tax Act would take effect from 24-8-2003.

Subject to the above clarification and leaving all other questions of law open, the appeal is disposed of with no order as to costs. (AY. 1998-99)

S.17(3) : Profits in lieu of salary – Tips received by employees is not salary hence not liable for deduction of tax at source

Held that as “tips” are paid to employees of the assessee by an outsider on a voluntary basis and the employees have no vested right to receive the same, the same is not “salary” and the assessee has no obligation to deduct TDS. (CA Nos. 4435-37 of 2016, dt. 26-4-2016)

S.22 : Income from house property – Gross rent received was less than from the let out property – Tax effect was below limit prescribed in CBDT circular – Appeal was dismissed leaving question of law open

High Court held that the Tribunal was right in law in directing the Assessing Officer to adopt the gross rent received by the assessee being lessor from the let out property for the purpose of computation of income from house property in place of much higher fetched by the lessee by sub letting the same property. On appeal by revenue, Apex Court dismissed the appeal as the tax effect was below limit prescribed in CBDT circular, leaving the question of law open. (AY. 1991-92).

CIT v. Hemraj Mahabir Prasad Ltd. (2016) 382 ITR 170 (SC)

S.32 : Depreciation – Carry forward and set off – Amendment in 1996 – Effect – Unabsorbed depreciation as on 1-4-1997 can be set off against income from any head for AY immediately following 1-4-1997 and thereafter unabsorbed depreciation if any to be set off only against business income for a period of eight assessment years

Depreciation, unabsorbed or otherwise or current, could be set off against the income arising from business or profession or any other income but the left over portion thereof could not be set off in the AY 1998-99 except against the income arising from business or profession. SLP of assessee was dismissed. (AY. 1998-99)

S.37(1) : Business expenditure – Enhanced rent paid under agreement was held to be allowable

Dismissing the appeal of Revenue the Court held that in view of the revamp of the machinery a fresh agreement had been entered into, warranting the payment of higher rent, allowing the enhanced rent that agreement was not a sham transaction, and the High Court affirmed the findings of the Tribunal. (AYs. 1988-89, 1989-90, 1990-91)

The Hon’ble Apex Court dismissed the Special Leave Petition filed against the order of the Gujarat High Court in the case of CIT v. Sandvik Chokshi wherein it was held that the Assessing Officer could not have invoked Explanation 3 to section 43(1) and disallowed the depreciation as, at the time of transfer of assets, there was no income for the assessee for it to reduce its tax liability and therefore, refused to interfere with the finding of the CIT(A) and ITAT. (AY. 1997-98)

CIT v. Sandvik Chokshi Ltd. (2016) 236 Taxman 482 (SC)

Note: However, for the subsequent assessment years from 1998-99 to 2002-03, the Hon’ble Apex Court has admitted the SLP filed by the Revenue against the order of the Gujarat High Court reported in CIT v. Sandvik Chokshi Ltd. [2015] 55 taxmann.com 453/230 Taxman 546 (Guj.). (AYs. 1998-99 to 2002-03)

Controversy on whether S. 80-1A(9) mandates that the amount of profits allowed as deduction u/s. 80-1A(1) has to be reduced from the profits of the business of the undertaking while computing deduction under any another provisions under heading “C” in Chapter VI-A of the Income-tax Act, 1961 is referred to larger Bench. While Hon’ble Mr. Justice Anil R. Dave took the view that the judgment of the Delhi High Court in Great Eastern Exports v. CIT [2011] 332 ITR 14 (Delhi) lays down the correct position in law and allowed the appeals of the Revenue, Hon’ble Mr. Justice Dipak Misra dissented and held that the law laid down by the Bombay High Court had in Associated Capsules Private Limited v. Dy. CIT [2011] 332 ITR 42 (Bom.) lays down the correct position in law and dismissed the appeals of the Revenue. In view of difference of opinion, the matters have been referred to a larger Bench in terms of signed reportable judgment. The Registry has been directed to place the matters before the Hon’ble the Chief Justice of India.

ACIT v. Micro Labs Ltd. (2016) 380 ITR 1 (SC)

S.80HHC : Export business – Total turnover – Sale proceeds of scrap cannot be included in total turnover

The issue in these appeals pertains to the question whether the proceeds generated from the sale of scrap would be included in the total turnover. In the recent decision of this Court in CIT v. Punjab Stainless Steel Industries & Ors. reported in [2014] 364 ITR 144 (SC) it has been held that sale proceeds generated from the sale of scrap would not be included in the total turnover for the purpose of deduction under Section 80HHC of the Income-tax Act, 1961. (AYs. 1989-90 to 1991-92)

High Court held that where the assessee exported marine products through an export house and received 3.5 per cent of freight on board value of the goods exported in Indian currency the sum received could not be considered as export turnover as it had not been received in convertible foreign exchange and part of the sum was not eligible for the benefit granted under section 80HHC. On appeal allowing the appeal the Court held that the assessee was entitled to the deduction. (AYs. 1994-95, 1995-96, 1996-97)

S.115JA : Book profit – SLP dismissed against the decision of the Karnataka High Court in the case of CIT v. Karnataka Soaps and Detergents Ltd. (2015) 59 taxmann.com 43 (Karn)(HC)

The Hon’ble Apex Court dismissed the Special Leave Petition filed against the order of the Karnataka High Court in the case of CIT v. Karnataka Soaps and Detergents Ltd. wherein it was held that the assessee is entitled to deduct the entire revenue expenditure as claimed in the profit and loss account prepared in accordance with the provisions of Part II of Schedule VI of Companies Act, 1956 for the purposes of computation of book profits under section 115JA of the Act through in the published accounts, such expenditure was deferred and recognised in the balance sheet. (AYs. 1999-00, 2000-01, 2006-07)

CIT v. Karnataka Soaps and Detergents Ltd. (2016) 236 Taxman 395 (SC)

S.147: Reassessment – Accrual of income – Even if income by way of rent is enhanced with retrospective effect, it accrues only when a right to receive the income is vested in the assessee – Notice to assessee the income prior to accrual is without jurisdiction

Following the ratio in E.D. Sassoon & Co. Ltd. (1954) 26 ITR 27(SC), the Court held that even if income by way of rent is enhanced with retrospective effect, it accrues only when a right to receive the income is vested in the assessee hence notice to assessee seeking to assess the income prior to accrual is without jurisdiction. (CA No. 4091 of 2016 dt. 19-4-2016)(AY. 1979-80)

A search was conducted at the residential and business premises of Assessee. Thereafter notice for block assessment under section 158BC of the Act was issued and returns were filed which were processed under section 143(1) of the Act. Thereafter, notice under section 148 was issued by the Assessing Officer on basis of certain reasons recorded. Order was passed under section 143(3) read with section 147, of the Act, pursuant to that appeals were filed before the Commissioner on Income Tax (Appeals), Income Tax Appellate Tribunal and the High Court.

The High Court found that the reasons recorded by the Joint Commissioner, for according section, only stated “I am Satisfied”. As this action for sanction was without application of mind and was done in mechanical manner, following the law laid down in case of Arjun Singh v. ADIT (246 ITR 363)(SC), the Commissioner (Appeals) quashed the notice issued under section 148 of the Act, and the same was upheld by Tribunal and the Hon’ble High Court.

The appeal of the Revenue before the Supreme Court was dismissed.

CIT v. S. Goyanka Lines & Chemical Ltd. (2016) 237 Taxman 378 (SC)

S.256 : High Court – Reference –Reference jurisdiction High Court should not act as an appellate Court to review such findings of fact arrived at by the Tribunal by a process of reappreciation and reappraisal of the evidence on record, unless disputed before the High Court

The Court held that it is well settled that issues of fact determined by the Tribunal are final and the High Court in exercise of its reference jurisdiction should not act as an appellate Court to review such findings of fact arrived at by the Tribunal by a process of reappreciation and reappraisal of the evidence on record. Unless a specific question with regard to an issue of fact being opposed to the weight of the material on record is raised in the reference before the High Court. On merit dismissed the appeal of assessee. (AY. 1984-85).

Ganapathy & Co. v. CIT( 2016) 381 ITR 363(SC)

S.269UA : Purchase of immovable property by Central Government – Understatement of consideration – Land held under lease from Municipality – Comparable instance of sale taken of property in adjustment and commercial property – Order for pre-emptive purchase was vitiated. [S. 269UD]

Allowing the appeal the Court held that the Authority had wrongly compared the commercial premises which shows notice was visited by gross violation of mind. Authority also erred in holding that V had transferred property to the extent of 78 per cent to U for consideration of ` 1,00,40,000 was not in respect of built up area but for transfer of subject land. Thus the order of Appropriate Authority suffered from gross perversity. The Court also held that the High Court had failed to render a finding on the relevance of the comparable sale instances, particularly, why a sale instance in an adjusting locality had been considered valid instead of sale instance in the same locality. Accordingly the order of High Court was reversed.

S.10 : Reopening of assessment –If no assessment order is passed, there cannot be a notice for re-assessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance

The issue for consideration relates to the Assessment Year 1997-98 under the Interest- tax Act, 1974. On the return filed by the appellant/assessee for this Assessment Year, no assessment order was passed. However, much after the last date of the Assessment Year is over, the Assessing Officer sought to reopen the assessment by issuing notice under Section 10 of the Act and thereafter proceeded to reassess the interest chargeable under the aforesaid Act. The matter was carried in appeal by the assessee. The main contention of the assessee was that when there was no assessment order passed in the original proceedings there was no question of reopening the so-called assessment and making the reassessment. The Commissioner of Income Tax (Appeals) accepted the aforesaid contention and set aside the reassessment order. This order was upheld by the Income Tax Appellate Tribunal as well. However, in further appeal filed by the Revenue before the High Court, the High Court reversed the view taken by the Tribunal holding that even if there was no original assessment order passed under Section 10 of the Act, there could be reassessment. The High Court held that the judgment of the Supreme Court in Trustees of H.E.H. The Nizam’s Supplemental Family Trust v. CIT [2000]242 ITR 381 SC would not govern the case at hand. On appeal by the assessee to the Supreme Court HELD reversing the High Court:

“We are of the opinion that the High Court has wrongly not acted upon the ratio laid down in Trustees of H.E.H. the Nizam’s Supplemental Family Trust’s which squarely applies in the instant case in favour of the assessee. The ratio of the said judgment is that in those situations where there is no assessment order passed, there cannot be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.” (AY. 1997-98)

S.2(e) : The land on which a building is under construction is liable to wealth tax

The taxpayer, an HUF was co-owner of a land situated at a village in Bengaluru District. The taxpayer entered into various development agreements for the construction of residential flats. The taxpayer claimed that it had retained ownership of the land until the flats are fully constructed, and therefore, it continued to be the owner of the land for the Financial Year 1995-96 and the subsequent years till their sale. A notice under Section 17 of the Wealth Tax Act (the Act) was issued to the taxpayer, and it filed a return of wealth. The Assessing Officer held the property as urban land and brought it to tax. On Department’s appeal the High Court reversed the order of the Tribunal holding that the taxpayer was entitled to the benefit of clause (ii) to Explanation 1(b) to Section 2(e)(a)(v) of the Act, as the building had not been constructed and was still under construction during the relevant year.

On the assessee’s appeal the Supreme Court held that the ‘Urban land’ is to be included in calculating the ‘net wealth’ for the purpose of determining wealth tax under the Act. However, certain lands are not to be treated as ‘urban land’ that are mentioned in Explanation 1(b) to Section 2(e)(a)(v) of the Act.

A plain reading of the said clause makes it clear that in order to avail the benefit, the following conditions have to be satisfied: (a) The land is occupied by any building; (b) Such a building has been constructed; and (c) The construction is done with the approval of the appropriate authority.

The plain language of the provision indicates that the benefit of the said clause would be applicable only in respect of the building ‘which has been constructed’. The expression ‘has been constructed’ cannot include within its sweep a building that is not fully constructed or is in the process of construction. The opening words of clause (ii) to Explanation 1(b) to Section 2(e)(a)(v) of the Act states ‘the land occupied by any building’. The land cannot be treated to be occupied by a building where it is still under construction. Thus the Supreme Court dismissed the appeal filed by the assessee. (AY. 1996-97)